CONSERVATISM CONSEPT

Conservatism concept is another user constraint in the application of basic accounting principles. This principle holds that ‘when more than one accounting or measurement alternative is permissible for a transaction, the one having the least favorable immediate effect on net income or owners’ equity usually should be selected. We are to follow the concept, ‘anticipate all possible losses but no profit’ i.e., the principle ignores all unrealized gains and provides for all anticipated losses. For example, the rule of ‘lower of cost or market (LCM)’ in valuing inventories is still applied. It implies that the highest values of liabilities and expenses and the lowest values of assets and revenues should preferably be reported.